High Inflation Fear Triggers a New High in the Crypto Market: Weekly Market Review From TokenInsight
- On Wednesday, U.S. CPI data surged to its highest level since 1990, sparking a surge in panic buying of inflation-resistant assets. BTC prices briefly surpassed $69,000, with both derivatives and spot markets hitting new highs on various indicators.
- The prevalent high inflation environment significantly contributes to sustaining elevated cryptocurrency prices. Despite ongoing regulatory concerns about the considerable risks in the crypto market, individuals ranging from business executives to the general public are increasingly turning to cryptocurrencies as tools to hedge against inflation.
- Given the prevailing high inflation backdrop, major capital market central banks have not yet contemplated taking drastic measures. However, the crypto market’s accumulating leverage may pose imminent risks to be addressed.
Table of Contents
- CPI & BTC, ETH: “All-Time High”
- Cryptos Become an Important Tool in the Fight Against Inflation
CPI & BTC, ETH: “All-Time High”
On Wednesday, the October Consumer Price Index (CPI) in the U.S. surged to a record annual rate of 6.2%, surpassing market expectations by a considerable margin. In Europe, the inflation rate in Britain has climbed to 3.1%, and this upward trajectory seems unrelenting. The governor of the Bank of England issued an “apology” for this situation, but from the investors’ perspective, it implies the same concern conveyed by the U.S. CPI data: a perception that central banks might be losing control over inflation. Following the release of the CPI data, Bitcoin’s price quickly soared to over $69,000 due to panic-driven buying, and Ethereum surpassed the $4,800 mark. However, the market subsequently experienced a rapid retreat. As of the afternoon of November 12, 2021, the price of Bitcoin has stabilized around the $65,000 level.
This sudden price swing resulted in a significant uptick in market volatility, surging by 10% in a brief timeframe and causing a wave of small-scale liquidations in the derivatives market. On November 11, the total value of liquidated perpetual contract positions exceeded $600 million, reaching the highest level in almost two weeks. Nonetheless, this figure was relatively moderate compared to the liquidation levels witnessed in September and October.
The recent round of liquidations has not diminished investors’ enthusiasm. According to TokenInsight, the value of open positions in perpetual contracts on major cryptocurrency exchanges has exceeded $62 billion, marking its highest point in nearly three months. Furthermore, in the options market, the open interest of BTC option contracts on the Deribit exchange alone has surpassed 200,000, with a combined value exceeding $13 billion.
Investor sentiments towards the future performance of cryptocurrencies have dampened.
In the futures market, the premium term structure has shown a general decrease, with the premium falling to around 11% – 15%. Moreover, a significant uptick in the purchase of put options in the options market has contributed to a decline in market skewness, indicating a prevailing sense of caution.
The current scenario is a reaction to liquidity contraction and a precaution against potential radical macro policies (such as interest rate hikes) in the future. However, considering the stance of central banks, the accumulated leverage in the derivatives market may become a risk that requires increased attention.
Cryptos Become an Important Tool in the Fight Against Inflation
Amidst high CPI, individuals, including Apple CEO Tim Cook, and companies are turning to crypto investments as a hedge against inflation. Robinhood reported over 1.6 million users on the crypto wallet waiting list, with plans to launch the wallet by Q1 2022. AMC CEO mentioned support for Bitcoin, Ethereum, Bitcoin Cash, and Litecoin payments, with plans to add Dogecoin. The adoption of cryptocurrencies, both as an investment and payment method, is seen as an effective strategy against inflation, forming a consensus among businesses and individuals, at least for the current situation.
Several central banks express dissatisfaction with using cryptocurrencies as a hedge against inflation. The Russian Central Bank and the Swedish Central Bank note additional risks to financial stability with crypto adoption. The governor of the Indian Central Bank highlights serious issues in terms of the macro-economy and financial stability associated with cryptocurrencies. However, given the limitations of available tools to combat inflation in the short term, many people see hedging inflation through certain risks, including crypto, as a preferable option.
Some institutions believe that the risks associated with cryptocurrencies are manageable compared to inflation. Fitch, an international credit rating agency, states that the risk of Bitcoin in El Salvador’s banking industry depends on the effectiveness of supervision. As of now, El Salvador’s banking industry does not face significant direct financial or market risks due to Bitcoin being recognized as legal tender.
In the current context of high inflation, the risks associated with cryptocurrencies may be relatively limited compared to inflation risks. As central banks adopt varying degrees of a wait-and-see approach to the current inflation situation, the demand for crypto spot transactions or investment exposure to cryptocurrencies remains substantial. This demand provides relatively stable support for cryptocurrency prices, although potential risks may arise from within the crypto market, such as excessive market leverage.
